When Should You Value Inherited Stocks: At Death or After Six Months?
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When someone passes away, their heirs often inherit more than just grief; they inherit assets, including stocks and other financial holdings. And when it comes to determining how much those stocks are worth for tax purposes, timing can be everything. Executors of estates have two valuation options: use the stock’s fair market value on the date of death, or go with the value six months later, known as the alternate valuation date. Selecting the right date can make a significant difference in the taxes owed.
The goal of this choice is to minimize estate tax liability. If the stock market takes a dive in the months following death, valuing stocks at the lower six-month mark can save the estate money. But if stock values rise, the date-of-death valuation may prove more beneficial. The key is understanding how cost basis and stepped-up basis work, and when it makes sense to choose one date over the other.
Understanding Cost Basis & Step-Up Rule
Simply put, the cost basis is what the IRS uses to determine the profit or capital gain when an asset is sold. For stocks, it usually includes the purchase price and any associated costs, such as brokerage fees.
When stocks are inherited, the IRS provides heirs with a major tax break through a step-up basis. Instead of carrying over the original purchase price from the deceased, the IRS resets the stock’s value to its fair market value at the time of death. This means that if an heir sells the stock shortly after inheriting it, there may be little to no capital gain tax due.
For instance, if your parent bought stock for $100,000 years ago and it is worth $300,000 when they pass away, you will inherit it at the value of $300,000. Sell it shortly after for a similar amount, and you will likely owe little to no capital gains tax.
Without the step-up basis, you would owe taxes on the $200,000 gain, even though you did not benefit from that appreciation. This is one reason many choose to pass on appreciated assets after death rather than gifting them during their lifetime.
Why the Alternate Valuation Date Exists
But what if the market drops significantly after the date of death? That is where the alternate valuation date comes in. The estate can elect to value the assets six months after the decedent’s death, only if doing so reduces the gross estate value and the estate tax liability. If no estate tax is due, the alternate valuation cannot be used, even if the value drops.
This option is particularly helpful during volatile market conditions. Imagine inheriting stock worth $500,000 on the date of death, but six months later, it is only worth $400,000. If the estate is subject to federal estate tax, the difference in valuation can reduce the tax bill considerably.
The alternate valuation must be applied consistently across all applicable assets, not selectively on a case-by-case basis.
When Should You Choose the Alternate Valuation Date?
Deciding which valuation date to use comes down to a simple but important question: Has the overall value of the estate dropped in the six months following the decedent’s death?
If yes, then using the lower value, you can save on taxes. It also resets the cost basis for the heir at the lower market value, which could result in higher capital gains if the stock rebounds and is sold later.
If the market is up or the estate is not taxable, the date-of-death value is likely the better route. Either way, this is not a decision you want to make in the dark. Executors should work with tax advisors and estate planning professionals to weigh the trade-offs.
Final Thoughts
Valuing inherited stock is more than just picking a number; it is about strategic tax planning. The choice between the date of death and the alternate valuation date can significantly impact both estate taxes and the taxes that heirs will pay down the line. With the right guidance, it is possible to make a decision that preserves more of the estate’s value for the people left behind.